Defining Bareboat Demise Charters: What They Are and How They Differ
Bareboat demise charter contracts are agreements in which the owner of a vessel transfers its possession and control to a charterer for a specified period of time. Although the demise charter has existed for a long time, its legal ramifications within the admiralty context are nascent.
In addition, bareboat demise charters differ substantially from time charters and voyage charters. Under a time charter , the owner of the vessel retains possession and control of the vessel subject only to a general right to direct the vessel’s route and to order the charterer to suspend or terminate the charter. The charterer, in turn, has the right to direct the vessel’s route. A voyage charter provides the charterer with the use of the vessel to transport cargo from one location to another. In contrast to time and voyage charters, under a bareboat demise charter, the vessel owner parts with possession, use and control of the vessel for the duration of the charter.
The Legal Nature of Bareboat Demise Charters
The legal character of bareboat demise charter contracts is traditionally considered to be that of a lease; however, it is important to bear in mind that such contracts are also bound by the rules of the law of Agency.
The general principle behind bareboat demise charter contracts, is that upon entering into such a contract, the charterer or person in possession, undertakes to provide the master and crew and takes on the risk and responsibility for operating and managing the vessel. The vessel is, unless otherwise agreed, at the charterer’s risk and expense. However, it follows from the rules of agency, that a bareboat demise charter will only be valid and binding on the parties if an agency has been created.
The courts have emphasised three conditions that must be satisfied before a valid agency can be created when entering the contract. Those three conditions are;
Although bareboat demise charter contracts can clearly be characterised as leases or contracts, the parties to a bareboat demise contract should ensure that the conditions under UK law are met. This is in order to avoid the contract being void for lack of capacity to contract.
There are a number of other conventions and regimes that may be relevant in this regard and, therefore, should be considered when entering a bareboat demise charter. For example, under the 1952 Arrest Convention, Article 3(1)(b) provides that vessels may be arrested for port charges.
All these issues must be taken into account when entering into a bareboat demise charter contract.
Essential Provisions in a Bareboat Demise Charter Contract
The essential elements of a bareboat demise charter contract include:
- (1) the date of the contract;
- (2) the identities of the parties (i.e., the owner and the charterer);
- (3) an appropriate vessel description, including the registration number with its flag state;
- (4) the duration of the charter, generally expressed as a specific time period for "a hire or hires" or on a "trip-at-a-time" basis, within a specified calendar range or even a base number of trip segments on a voyage route;
- (5) the money or other consideration the charterer is to pay to the owner and the payment method (e.g. guaranteed check or wire transfer with the amount determined by fixed fee, per diem, per tonnage or percentage of freight, depending on whether the vessel is a barge, carrying container cargo, or a tanker carrying bulk crude oil or chemicals or other materials);
- (6) the vessel management requirements and insurance coverage necessary for the vessel operation, such as the responsibility for ensuring compliance with maritime safety regulations;
- (7) the commercial, insurance, federal, state, and local licensing and documentation obligations required for the authorized operation of the vessel;
- (8) the due diligence obligations on both the owner and the charterer to avoid vessel damage, loss, or detention, or third-party bodily injury and property damage or pollution claims from vessel operations; and
- (9) the conditions under which the charterer can properly terminate the charter (e.g. essentially subject to consent or waiver by the owner if the charterer is not in material breach of the charter terms, such as at-will termination or by mutual rescission or upon destruction of the vessel), versus when the termination will be regarded as a default (e.g. if the charterer fails to pay hire correctly, performs a "piratical" seizure of the vessel, or aborts the voyage without having the vessel return to the commencement port for the next scheduled segment).
Managing Obligations and Administration of the Contract
Here, the privity of the demise is key. Where the demise is in existence, that is where the demise owner has ceded its ownership interest and control to the demise charterer, the demise charterer has a right to exclusive possession of the vessel. As a consequence, the demise charterer will be carrying out a number of operational obligations and management of the vessel to ensure its navigation and seaworthiness, amongst other things. In the case of Cotshipping v Shireen Shipping Corporation 2012 1 Lloyd’s Raop. 524, the relevant cluse stated that: "the charterer must at its own expense provide all crew, provisions, carpets, curtains, bed and cabin linen, on board spare gear and paint and supplies, and pay all port and light dues, pilotage and other ship expenses for which demise owner should be responsible to the extent demise owner would have been liable if the vessel had not been demised at the time when the same become due and payable."
Financial Terms and Payment Agreements
A typical payment structure in a bareboat demise charter is a fixed charter hire. Charter hire is generally expressed as either 1) a lump sum or 2) a per day rate. Charter hire will vary from one contract to another and depends on the type and size of the subject vessel. For example, current market rates for an 80,000 dwt crude carrier may exceed $50,000 per day. Obviously, the per day figures for a submersible drilling rig valued at $650 million will be much higher. Generally, the parties will agree to a lump sum for the term of the charter which is then divided by the number of days to arrive at a per day rate. The lump sum figure would therefore be comprised of the following: 1. Base charter hire as agreed by the parties. 2. Taxes, customs duties and other similar charges applicable to the payment of the charter hire. 3. Agency fees. 4. Insurance premium. 5. Broker’s commission, if applicable. 6. Special club membership fee. 7. Additions, alterations and if any, alternative ownership. 8. Any master’s overtime. 9. Any additions and depreciation allowances. 10. Any pro rata depreciation for fixtures, fittings and furniture if considered a permanent fixture and not usual to the shipping trade. Outside this term would be equipment such as portable air conditioning units, deck grating etc. 11. Pro rata wages and allowances if the price includes the crew . 12. Decorations, statutory safety equipment and crew protection goggles. It is important to note, the lump sum figure must be paid in advance, typically monthly. The payment would be adjusted for any applicable taxes and customs duties on a pro rata basis. For example, if the applicable tax rate is 5 percent then the charter hire amount would increase by five percent multiplied by the number of days times the base charter hire rate. The payment mechanism for the agreed adjustment can be found in clause 6 of LEASES. The first payment will be due on the effective date of the charter. A separate daily charter hire is also commonly agreed in lieu of the lump sum payment. Under this payment structure, charter hire is due on the anniversary of the commencement date and every 30th day thereafter. These charges are usually adjusted to reflect the current charter rate of other vessels of similar type. In addition to the foregoing, charters can expect to pay agents fees. Foreign ports where proper credit facilities are not offered, the charterer must prepay the agent’s fees. Further, if a charterer has no representation in the port, the charterer is advised to use local agents and make arrangements for the remittance of their fees. Mobilization and demobilization costs are typically borne by the owner but it is advisable to negotiate this point in advance.
Maintenance, Compliance, and Obligations
The obligations under a bareboat demise charter contract include a requirement on the part of the charterer to ensure that the vessel is maintained throughout the duration of the charter contract. This generally encompasses a range of vessel components and machinery which the charterer will be responsible for. The obligations will depend on the terms of the bareboat demise charter contract, but typically include engine maintenance and repairs, hull inspections and repair, propeller maintenance and fuel efficiency measures. It will also extend to certification of safety equipment.
The compliance aspects of any bareboat demise charter contract should not be underestimated. The vessel will have been delivered and accepted by the charterer subject to an approval process and therefore, as a practical point, it will be the charterer’s responsibility to continue to comply with these same requirements of the charterer. The safety aspects of this are paramount and will include compliance with SOLAS requirements such as provision of GMDSS equipment, lifeboats etc. The International Ship & Port Facility Security Code (ISPS Code) also requires compliance with the following – Ship Security Plan, Declaration of Security and Ship Security Alert System (in some instances).
In addition, where the vessel is intended to operate in port facilities and carry out specific cargo operations, the vessel must comply with the ship environment control fee regulations. These apply to bulk carriers, oil tankers and gas carriers. Equally, the International Air Pollution Prevention Certificate and International Oil Pollution Prevention Certificate are required to be complied with by the vessel. These are essential in order for the vessel to operate in bulk and oil/chemical operations.
Compliance with class requirements will also fall within the charterer’s remit, along with any additional requirements for a particular voyage, trade or operation.
Breach and Contract Termination
The termination of the contract can be requested, according to the general principle of art. 1459 para. 1, no. 2 Civil Code, in the event of a breach by one of the parties or an express or tacit waiver of the other party. When one of the parties commits a breach, the burden of proof lies with the party who claims the breach of contract. In case of non-performance or improper performance of the contract by one of the parties, the other party may invoke the Italian Civil Code provisions on breach of contract and request specific performance or the termination of the contract, provided the wrongdoer has previously been served with a formal notice to perform within the time limit set by the notice itself. In some cases, the party who has breached the contract may be justified and, therefore, the contract cannot be terminated for breach. In case this is not possible, e.g. where the notice period is too long or the wrongdoer refuses to accept the termination request, the party wishing to terminate the contract may formally inform the other party of its intention to terminate the contract as a consequence of the breach which has been brought to the attention of the party in breach. Since it is always difficult to identify whether there has been a breach of contract or not, the parties may resort to the arbitration clause. In fact, in the case of disputes over the existence of a breach of contract, the claimant may start arbitration proceedings and request a declaratory judgment on the existence of a breach.
Negotiation Tips for Charters
Negotiations often focus on a handful of provisions unique to these contracts. For instance, terms such as delivery and redelivery locations, maintenance and repair obligations, hire payment, and bunkers will require careful attention from both contracting parties. Conversely, parties may be able to overlook certain standard clauses or other less contentious issues as they enter the negotiation process.
Redelivery locations and timing can often be contentious issues in the charter negotiations. The charterer will likely want to utilize the vessel for the full term of the charter, whereas the owner may wish to redeliver the vessel to its original delivery port. In addition, charterers will want to ensure sufficient time to redeliver the vessel upon expiration of the charter party to avoid off-hire costs for the period between redelivery and off-hire.
Another major area of focus during negotiations in the sale or lease of a vessel is the payment of hire. Under a bareboat demise charter, hire is typically due annually or quarterly in advance. Often, the parties will further specify that payment of hire is due in the currency at the charterer’s option at the time of payment. This practice, however, has some roots in the past, when currencies were not as easily exchanged for one another. Accordingly, it is important to consider whether such a provision is still favored after introduction of more uniform platforms for currency exchange .
Charterers may also withhold payment of hire if the vessel is not delivered to a "safe port." This right is somewhat unique to the bareboat demise charter. As a result, parties should consider whether the port where the vessel is to be redelivered is favorable to the charterer. In addition to considering the safe port issue, the parties should look to other contingent payments such as taxes, which may constitute a lien, or hire termination fees for the period between the vessel’s redelivery and redelivery to her owner.
The parties may also discuss which will be responsible for layup and maintenance costs during the term of the charter contract. Charterers may be able to negotiate for owners to cover the cost of holding the vessel on demurrage or layup. However, in doing so, charterers should also take into account any recourse the owner may have if the vessel is damaged or lost during this period.
It is also important to consider the operational provisions of the charter party in the negotiation process. Some standard operational provisions on the technical management of the vessel involve such topics as repairs, statutory survey and certificates, and drydocking and drydocking costs.
It is vital that both contracting parties carefully consider the risks that may arise during the negotiation process. By learning which points to emphasize during negotiations and which points to overlook, parties can ensure that their negotiations result in mutually beneficial agreements.